10-Q 1 form10q-55369_ccbt.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period ended September 30, 2003 Commission File No. 000-25381 CCBT FINANCIAL COMPANIES, INC. (Exact name of Registrant as specified in its charter) Massachusetts 04-3437708 (State of Incorporation) (I.R.S. Employer Identification No.) 495 Station Avenue, South Yarmouth, Massachusetts 02664 (Address of principal executive office) (Zip Code) (Registrant's telephone number, incl. area code): 508-394-1300 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| Yes |_| No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). |X| Yes |_| No There were 8,420,198 shares of the issuer's common stock outstanding as of November 7, 2003. 1 TABLE OF CONTENTS

2 PART I FINANCIAL INFORMATION ITEM 1. Financial Statements CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these unaudited, consolidated financial statements. 3 PART I FINANCIAL INFORMATION ITEM 1. Financial Statements (continued) CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these unaudited, consolidated financial statements. 4 PART I FINANCIAL INFORMATION ITEM 1. Financial Statements (continued) CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30,

The accompanying notes are an integral part of these unaudited, consolidated financial statements. 5 PART I FINANCIAL INFORMATION ITEM 1. Financial Statements (continued) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Nine Months Ended September 30,

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Nine Months Ended September 30,

The accompanying notes are an integral part of these unaudited, consolidated financial statements. 6 PART I FINANCIAL INFORMATION ITEM 1. Financial Statements (continued) CCBT FINANCIAL COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Nine months ended September 30, 2003 and 2002 (Unaudited) 1. Business CCBT Financial Companies, Inc. ("Company") was incorporated under the laws of the Commonwealth of Massachusetts on October 8, 1998 and is the bank holding company for Cape Cod Bank and Trust Company (the "Bank"), a national bank. Currently, the Company's business activities are conducted primarily through the Bank. 2. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Certain amounts have been reclassified in the September 30, 2002 financial statements to conform to the 2003 presentation. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the current fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2002. 3. REIT Tax Law Dispute With Massachusetts Department of Revenue CCBT Preferred Corp. ("CCBT Preferred") was a real estate investment trust ("REIT") subsidiary formed by the Bank in the second quarter of 1999. Since that time and prior to the enactment of the new tax legislation and settlement discussed below, the Bank had taken a tax deduction under a Massachusetts statute that provides for a dividends received deduction equal to 95% of certain dividend distributions made by CCBT Preferred to the Bank. As previously announced, the Bank received notices of assessment from the Commonwealth of Massachusetts DOR for tax years ended December 31, 1999, 2000 and 2001 based on the DOR's contention that dividend distributions by CCBT Preferred to the Bank are fully taxable in Massachusetts. In the first quarter of 2003, the Company accrued a liability of approximately $5.1 million, representing an estimate of the additional state tax liability, including interest (net of any federal and state tax deductions associated with such taxes and interest), relating to the deduction for dividends received from the REIT for the 1999 through 2001 fiscal years, and the previously anticipated deduction for fiscal 2002, thus reducing earnings by $5.1 million in the first quarter of 2003. The accrued liability was the result of legislation signed March 5, 2003 by the Governor of Massachusetts that amended Massachusetts law to expressly disallow the deduction for dividends received from a REIT. This amendment applied retroactively to tax years ending on or after December 31, 1999. As a result of the enactment of this legislation, the Company ceased recording the tax benefits associated with the dividends received deduction effective for the 2003 tax year and accrued the liability described above. On June 23, 2003, the Company entered into a settlement with the Massachusetts Department of Revenue ("DOR"), and agreed to pay approximately 50% of the disputed tax liability which had previously been accrued. As a result of the settlement, the Company recognized a reduction of income tax and related interest expense of approximately $2.5 million in the second quarter of 2003. The Company's settlement with the DOR is similar to settlements entered into by, and in participation with numerous other financial institutions in Massachusetts. On July 31, 2003, the Company received approval from the Secretary of the Commonwealth of Massachusetts to liquidate and dissolve CCBT Preferred and the dissolution was effected on August 31, 2003. 4. Stock Compensation Plans At September 30, 2003, the Company has two stock-based employee compensation plans, which are described more fully in Note 6 of the Company's annual report on Form 10-K for the year ended December 31, 2002. The Company accounts for its stock option plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related 7 PART I FINANCIAL INFORMATION ITEM 1. Financial Statements (continued) Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the fair value of the underlying common stock on the date of grant. Had the Company applied SFAS No. 123, "Accounting for Stock -Based Compensation", for the quarter ended September 30, 2003, the additional net after-tax expense of $67,000 would have resulted in pro-forma basic and diluted earnings per share to be reported as $.26 as compared to $.27 per share. For the quarter ended September 30, 2002, the additional net after-tax expense of $59,000 would have resulted in pro-forma basic and diluted earnings per share being reported as $.45 and $.44, respectively, as compared to the $.45 per share reported. Had the Company applied SFAS No. 123, "Accounting for Stock -Based Compensation", for the nine months ended September 30, 2003, the additional net after-tax expense of $194,000 would have resulted in pro-forma basic and diluted earnings per share being reported as $.59 as compared to the $.61 per share reported. For the nine months ended September 30, 2002, the additional net after-tax expense of $176,000 would have resulted in pro-forma basic and diluted earnings per share being reported as $1.54 as compared to the $1.56 per share reported. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General This Form 10-Q contains certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company's actual results could differ materially from those projected in the forward-looking statements as a result, among other factors, of changes in general, national or regional economic conditions, changes in loan default and charge-off rates, reductions in deposit levels necessitating increased borrowing to fund loans and investments, changes in prevailing interest rates and increases in mortgage prepayments which may reduce interest margin, changes in the size and nature of the Company's competition, and changes in the assumptions used in making such forward-looking statements. The following discussion should be read in conjunction with the accompanying consolidated financial statements and selected consolidated financial data included within this report. Given that the Company's principal activity currently is ownership of the Bank, for ease of reference, the term "Company" in this item generally will refer to the investments and activities of the Company and the Bank except where otherwise noted. CCBT Financial Companies, Inc. is a bank holding company. Its main operating subsidiary, Cape Cod Bank and Trust Company, N.A. is the largest commercial bank headquartered in Barnstable County, Massachusetts. It offers a wide range of banking and financial services for individuals, businesses, non-profit organizations, governmental units and fiduciaries. The Bank receives substantially all of its deposits from, and makes substantially all of its loans to, individuals and businesses on Cape Cod, although the Bank has some loans on properties outside its market area, including some sizable participations in commercial mortgages. The Bank's core market is comprised of retail and wholesale businesses; primary households (including a significant retirement population); and a growing number of second homeowners. In addition, a substantial non-core vacation population causes seasonal deposit growth. (The remainder of this page intentionally left blank.) 8 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.)

9 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.)

10 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) RESULTS OF OPERATIONS Three and Nine Months Ended September 30, 2003 vs September 30, 2002 Net Income. Net income was $2.3 million or $0.27 per share and $5.2 million or $0.61 per share for the three and nine months ended September 30, 2003 as compared to $3.9 million or $0.45 per share and $13.5 million or $1.56 per share for the respective periods in 2002. Following is a discussion of the major factors affecting the results of operations for the periods. Net Interest Income. Net interest income was $9.9 million and $31.3 million for the three and nine months ended September 30, 2003 as compared to $12.7 million and $37.8 million for the same periods in 2002, representing decreases of 22.3% and 17.3%, respectively. The net interest spread and net interest margin ratios were 2.7% and 3.2%, respectively, for the quarter ended September 30, 2003, as compared to 3.0% and 3.6%, respectively, for the prior year. The net interest spread and net interest margin ratios were 2.9% and 3.2%, respectively, for the nine months ended September 30, 2003, as compared to 3.2% and 3.7%, respectively, for the prior year. The decline in net interest income for the comparative periods can be attributed to the lower levels of average earning assets and interest bearing liabilities due to pre-payments and refinancings coupled with the narrowing of interest rate spreads and margins. The extended period of lower rates, declining since 2001, has effectively decreased the yield on all earning asset classes in both the three and nine months ended September 30, 2003 when compared with the same prior year periods. With the Federal Open Market Committee's (FOMC) targeted federal funds rate at 1.00%, the current interest rate environment is at a 45-year low. Lower mortgage rates, in particular, have substantially accelerated pre-payments on both residential mortgage loans and investment securities backed by housing collateral. In this low-rate environment, residential mortgage borrowers have refinanced from adjustable-rate to fixed-rate mortgages, which are sold to mitigate future interest rate risk. This activity in the residential mortgage portfolio has significantly reduced the average balance of residential mortgages outstanding for both the three and nine months ended September 30, 2003 when compared to the comparable periods in 2002 and has more than offset the positive growth in the Company's other loan categories. Investment securities backed by housing collateral (Mortgage Backed Securities (MBS) and Collateralized Mortgage Obligations (CMOs)) have also been subject to accelerated pre-payments of principal during this low rate environment and combined average balances in these categories for the three and nine months ended September 30, 2003 are lower in comparison to the comparable periods in 2002. As loans and investments have declined, average borrowings have correspondingly decreased. This funding decline has been partially offset by increases in average deposits during both the three and nine months ended September 30, 2003 and reflect organic growth in core deposits as the year-round Cape Cod region population continues to increase. As previously stated, lower mortgage rates have been an incentive for mortgage borrowers to refinance their loans and thus accelerated pre-payments on both residential mortgage loans and investment securities backed by housing collateral (MBS and CMOs), resulting in reinvestment of the principal proceeds at much lower rates. Interest income, in these categories, has also been reduced as accelerated pre-payments have stepped up the write-off of deferred costs on residential mortgage loans and hastened the amortization of premiums paid on mortgage related investment securities. The Company's CMO securities, in particular, have experienced a significant negative impact upon their yield, (1.20%) and 0.08% for the three and nine months ended September 30, 2003, as the acceleration in the amortization of premiums outpaced receipt of interest income. The Company has lowered its funding costs, however at a pace not equal to the decline in average earning asset yields given its substantial mix of non and low-interest average core deposits. Provision for Loan Losses. Recoveries on loans previously charged-off exceeded charge-offs during the three and nine months ended September 30, 2003 by $91,000 and $387,000, respectively. Management's assessment of the risks in the loan portfolio at September 30, 2003 as well as the Company's recent loss experience, whereby recoveries have actually exceeded charge-offs since 1997, resulted in no provision for loan losses for the three and nine months ended September 30, 2003. The allowance for loan losses as a percentage of total loans was 1.65% and 1.42% at September 30, 2003 and 2002, respectively, representing management's consideration of qualitative factors, primarily the weakness in local and national economic trends, and growth in higher-risk commercial loans. Non-Interest Income. Non-interest income totaled $5.8 million for the quarter ended September 30, 2003, unchanged from the same period in the prior year. Increases in financial advisor fees of $208,000, brokerage fees and commissions of $45,000 and insurance commissions of $156,000, represented an aggregate increase of 13.4% and reflect the Company's efforts to increase fee revenues. Net gain on sales of loans increased $336,000. These positive results were primarily offset by activity in net (loss) gain on securities and changes in other non-interest income. There were no net gains (losses) on securities recorded during the quarter ended September 30, 2003 as compared with a net gain of $538,000 during the same period in 2002. In the three months ended September 30, 2003, the Company recognized a net loss of approximately $400,000 on fixed assets related to the closure of nine Stop & Shop transaction offices. Non-interest income of $16.6 million reflected a decline of $2.7 million during the first nine months of 2003 as compared to the corresponding period in the prior year due primarily to the unfavorable change in the net gain(loss) on securities of $4.9 million. Security losses of $1.7 million were recorded during the 2003 period, including a $1.3 million impairment loss recognized on an asset backed security as well as losses from the sale of interest-only CMO's. By contrast, during the 2002 period, $3.2 million of gains were reported as a result of the sale of securities. The increase in net gain on sales of loans of $1.4 million and fee-based revenues of $1.1 million (financial advisor, brokerage and insurance commissions) during the first nine months of 2003 as compared to the same 2002 period helped to partially offset the unfavorable change in the net gain(loss) on securities. 11 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) Non-Interest Expense. During the third quarter of 2003, non-interest expense of $11.9 million reflected a decrease of $747,000 as compared to the third quarter of 2002. Decreases in salaries and employee benefits, down a combined $799,000, attributable to lower incentive related program costs, primarily account for the reduction in non-interest expenses for the comparative quarters. Other categories of non-interest expense within the quarter are reflective of the combination of changes in levels of activity as well as the effect of inflationary costs. Non-interest expense decreased $1.2 million or 3.3% from the first nine months of 2002 to the same period in 2003. A decrease in salaries and employee benefits of $1.6 million during the 2003 period as compared to 2002 can be attributed to the accrual of $506,000 of costs associated with an early retirement program during the 2002 period, the increase of $1.2 million in the 2003 period for the net deferral of salaries under FAS 91, largely due to the increased volume of residential mortgage originations and lower incentive related program costs. Partially offsetting these changes in salaries and benefits were increased costs related to annual merit increases and increases in benefit costs. In the first nine months of 2003, there was also a significant increase in all other expenses of $638,000 over the 2002 level primarily as a result of the $443 thousand of interest expenses on a state tax assessment which is the result of a retroactive amendment to state tax law during the first half of 2003. Provision for Income Taxes. The provision for income taxes decreased by 25.6% from $2.0 million in the third quarter of the prior year to $1.5 million in the comparable period in 2003 as income before income taxes decreased from $5.9 million to $3.8 million for the respective periods. The provision for income taxes increased from $7.0 million for the nine months ended September 30, 2002 to $7.3 million for the nine months ended September 30, 2003. This increase, despite the decrease in income before taxes, is due to the previously disclosed settlement in June 2003 of the REIT tax law dispute with the Massachusetts Department of Revenue. The settlement resulted in a net increase of $2.3 million in the income tax provision and an effective tax rate of 58.4% for the nine months ended September 30, 2003. The adjusted effective income tax rates for the three and nine months ended September 30, 2003 are 40.0% as compared with 34.2% for the comparable periods in 2002. The higher rate reflects the loss of the REIT tax advantage. (The remainder of this page intentionally left blank.) 12 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) COMPARATIVE ANALYSIS OF SELECTED PERIOD-END ASSETS, LIABILITIES AND CAPITAL The Company had $1.35 billion of consolidated total assets, $1.03 billion in deposits and $113.8 million in stockholders' equity at September 30, 2003. Its capital to assets ratio was 8.41%, exceeding all regulatory requirements. As compared to reported balances at December 31, 2002, investment securities decreased $102.5 million or 20.1%, loans decreased $29.2 million or 3.6%, deposits increased $87.6 million or 9.3% and borrowed funds decreased $198.6 million or 49.9%. Securities The amortized cost and estimated fair values of securities at September 30, 2003 and December 31, 2002 were as follows:

The Company invests in various investment grade structures, including mortgage securities (MBS and CMO's) and asset-backed securities, usually with short effective durations. These securities are subject to changes in market values and possibility of loss resulting from substantial changes in interest rates and from changes in credit risk arising from weak economic conditions. During this historic period of low interest rates, securities backed by mortgage collateral have experienced high levels of accelerated principal pre-payments with a corresponding acceleration of amortization of premiums. The acceleration in amortization of premiums on the Company's CMO securities, in particular, has had a significant negative impact upon their yield. No security gains or losses were recorded during the 13 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) quarter ended September 30, 2003. During the same period in 2002, the Company reported $538 thousand of gains. Securities available for sale decreased $154.3 million, from $510.8 million at December 31, 2002 to $356.6 million at September 30, 2003. In the quarter, the Company purchased moderate effective duration mortgage-backed securities with an amortized cost of $51.8 million at September 30, 2003 and designated them held as to maturity. Loans The following is a summary of the Company's outstanding loan balances as of the dates indicated:

As shown in the table above, total loans decreased $29.2 million or 3.6% to $772.2 million at September 30, 2003 as compared to December 31, 2002. Historically low mortgage rates have motivated mortgage borrowers to refinance into fixed rate mortgages resulting in significant levels of residential mortgage originations thus far this year. Fixed-rate residential mortgages are sold to the secondary mortgage market to mitigate future interest rate risk. As a result, total residential mortgage loans outstanding have declined $55.4 million during the nine months ended September 30, 2003. Net decreases in residential mortgage loans have more than offset the positive growth results realized in commercial mortgages, equity lines of credit and commercial loans, up $13.5, $13.1 and $1.6 million, respectively. During the quarter ended September 30, 2003, $84.1 million (fixed rate) and $42.1 million (adjustable rate) in residential mortgages were originated. During the same period, the Company sold $96.0 million in fixed-rate residential mortgages, producing net gains of $907 thousand. Allowance for Loan Losses The allowance for loan losses is an estimate of the amount necessary to absorb probable losses in the loan portfolio. The allowance consists of specific, general and unallocated components. Commercial real estate and commercial business loans are evaluated individually for allowance purposes. Other categories of loans are generally evaluated as a group. The specific component relates to loans that are classified as doubtful, substandard or special mention. Loans classified as doubtful are considered impaired in accordance with SFAS No. 114, and an allowance is determined using a discounted cash flow calculation. Loss factors for substandard loans are based on a loss migration database, while loss factors for all other categories of loans are based on the Company's historical loss experience with similar loans of similar quality as determined by the Company's internal rating system. Loss factors are then adjusted for additional points that consider qualitative factors such as current economic trends (both local and national), concentrations, growth and performance trends, and the results of risk management assessments. Accordingly, increases or decreases in the amount of each loan category as well as the ratings of the loans within each category are considered in calculating the overall allowance. The allowance is an estimate, and ultimate losses may vary from current estimates. As adjustments become necessary, they are reported in earnings of the periods in which they become known. In addition, the Company's allowance for loan losses is periodically reviewed by the Office of the Comptroller of Currency ("OCC") as part of their examination process. The OCC may require the Company to make additions to the allowance based upon judgments different from those of management. 14 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) Non performing assets and loan loss experience As shown in the following table non-performing assets were $3.3 million or .25% of total assets at September 30, 2003 compared to $2.8 million or .19% of total assets at December 31, 2002. This increase can be accounted for primarily by residential mortgage loans which, the Company believes, are adequately collateralized. Accrual of interest income on loans is discontinued when it is questionable whether the borrower will be able to pay the principal and interest in full and/or when loan payments are 60 days past due, unless the loan is fully secured by real estate or other collateral and is in the process of collection.

The following is a summary of the activity in the allowance for loan losses for the indicated periods:

Recoveries on loans previously charged off exceeded charge-offs therefore management determined that additions to the allowance for loan losses were unnecessary in 2003. The allowance represented 1.65% of total loans at September 30, 2003, 1.55% at December 31, 2002, and 1.42% at September 30, 2002. Although management believes that upon review of loan quality and payment statistics, the allowance is adequate to cover losses likely to result from loans in the current portfolio at September 30, 2003, there can be no assurance that the allowance is adequate or that additional provisions might not become necessary. The Company had outstanding commitments to originate new residential and commercial mortgages of $46.5 million at September 30, 2003 and $44.0 million at December 31, 2002 which are not reflected on the consolidated statement of financial condition. Additional unadvanced loan funds are summarized as follows for the indicated periods: September 30, 2003 December 31, 2002 ------------------ ----------------- Commercial loans (In thousands) Dealer floor plan $ 7,812 $ 6,618 Lines of credit 45,766 54,267 Other 1,372 3,231 Commercial mortgages Construction 27,886 32,480 Other 9,786 8,485 Residential mortgages Home equity 85,887 79,480 Consumer loans Lines of credit 3,471 3,388 -------- -------- Total $181,980 $187,949 ======== ======== 15 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) Deposits The following table is a summary of deposits outstanding as of the dates indicated:

Reflecting somewhat the seasonal nature of the Cape Cod economy as discussed in "Liquidity" on page 17 herein, total deposits at September 30, 2003 were $87.6 million or 9.3% higher than total deposits at December 31, 2002. Generally, the Company's strategy is to price deposits according to local market rates, offering higher alternative rates based on increasing amounts deposited. Interest rates paid are frequently reviewed and are modified to reflect changing conditions. Borrowed Funds Historically, the Company has selectively engaged in short- and long-term borrowings from the Federal Home Loan Bank of Boston ("FHLBB"), and has sold securities under agreements to repurchase, to fund loans and investments. At September 30, 2003, borrowed funds totaled $199.2 million, down 49.9% or $198.6 million compared to borrowed funds totalling $397.8 million at December 31, 2002. Borrowings with the FHLBB are collateralized by residential mortgage loans and securities. At September 30, 2003, the Company had approximately $120 million available in unused borrowing capacity with the FHLBB. CCBT Statutory Trust I was formed for the purpose of issuing trust preferred securities and investing the proceeds of the sale of these securities in subordinated debentures issued by the Company. A total of $5 million of floating rate Trust Preferred Securities were issued and are scheduled to mature in 2031, callable at the option of the Company after July 31, 2006. Distributions on these securities are payable quarterly in arrears on the last day of April, July, October and January. The Trust Preferred Securities are presented in the consolidated balance sheets of the Company as Subordinated Debt. The Company records distributions payable on the Trust Preferred Securities as interest on subordinated debt in its consolidated statements of income. Stockholders' Equity The Company's capital to assets ratio was 8.41% at September 30, 2003 compared to 7.99% at December 31, 2002. The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and/or the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Holding companies, such as the Company, are not subject to prompt corrective action provisions. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts of total and Tier 1 capital (as defined) to average assets (as defined). The following schedule displays these capital guidelines and the ratios of the Company and the Bank as of September 30, 2003.

16 PART I FINANCIAL INFORMATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (cont.) The Company's book value at September 30, 2003 was $13.51 per share compared to $13.79 per share at December 31, 2002. LIQUIDITY The Company normally experiences changes in its liquidity each year as a result of the seasonal nature of the economy in its market area. Liquidity is usually at its high in late summer and early fall and the annual low point is usually in the spring. In general, investment securities could also be sold if necessary to meet liquidity needs. In that event, a gain or loss would be realized if the market value of the securities sold was not equal to their cost, adjusted for the amortization of premium or accretion of discount. The Bank can also borrow funds using investment securities as collateral, and it has a line of credit of $5,000,000 from the Federal Home Loan Bank of Boston. The Bank has also established a line of credit of $7,000,000 for the purchase of federal funds from SunTrust Bank and may borrow from the Federal Reserve Bank if necessary. ASSET/LIABILITY MANAGEMENT The Company's Asset/Liability Management Committee ("ALCO"), which is comprised of several Directors with senior management, is responsible for managing interest rate risk in accordance with policies approved by the Board of Directors regarding acceptable levels of interest rate risk, liquidity and capital. The committee meets monthly and sets the rates paid on deposits, approves loan pricing and reviews investment transactions. Given the substantial liquidity from cash flow and maturities of the Company's investment portfolio, the sizable proportion of rate sensitive loans to total loans, and the large core deposit base, ALCO believes the Company to be moderately asset-sensitive to changes in interest rates. Nevertheless, the Company's strategy has included the funding of certain fixed rate loans with medium-term borrowed funds in order to mitigate a margin squeeze should interest rates rise. The Cape Cod market is one in which competing financial institutions frequently offer a wide range of yields for similar deposit products. Within this market, the Company finds it necessary, from time to time, to offer higher rates than it would otherwise justify, thereby increasing pressure on net interest income. In order to offset this pressure somewhat, the Company is strategically focusing on fee income growth from increasing customer relationship cross-selling. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk For a discussion of the Company's management of market risk exposure, see "Asset/Liability Management" in Item 2 of Part I of this report and Item 7A of Part II of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (the "2002 Annual Report"). For quantitative information about market risk, see Item 7A of Part II of the Company's 2002 Annual Report. There have been no material changes in the quantitative and qualitative disclosures about market risk as of September 30, 2003 from those presented in the Company's 2002 Annual Report. ITEM 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. The Company's chief executive officer and chief financial officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Sections 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this quarterly report, (the "Evaluation Date") have concluded that as of the Evaluation Date, the Company's disclosure controls and procedures were adequate and are designed to ensure that material information relating to the Company would be made known to such officers by others within the Company on a timely basis. (b) Changes in internal controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date. 17 PART I FINANCIAL INFORMATION ITEM 4. Controls and Procedures (continued) (c) Changes in internal control over financial reporting. There were no significant changes in the Company's internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected or is reasonably likely to materially affect, the Company's internal control over the financial reporting. PART II OTHER INFORMATION ITEM 1. Legal proceedings There are no material legal proceedings to which the Company is a party or to which any of its property is subject, although the Company is a party to ordinary routine litigation incidental to its business. ITEM 2. Changes in securities and use of proceeds Not applicable ITEM 3. Defaults upon senior securities Not applicable ITEM 4. Submission of matters to a vote of security holders Not applicable ITEM 5. Other information Not applicable ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Description ------- ----------- 31.1 Certification of President of CCBT Financial Companies, Inc., pursuant to rules 13(a)-15(e) and 15d-15(e), as adopted 1 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer of CCBT Financial Companies, Inc., pursuant to rules 13(a)-15(e) and 5d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of President of CCBT Financial Companies, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer of CCBT Financial Companies, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K On July 17, 2003 a report on Form 8-K was filed by the Company under Item 9 "Regulation FD Disclosure" reporting that a press release was issued announcing the Company's earnings for the second quarter 2003 and filing as an exhibit under Item 7 thereby, the press release dated July 17, 2003. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. (Registrant): CCBT Financial Companies, Inc. Date: November 7, 2003 /s/ STEPHEN B. LAWSON, President and Chief Executive Officer ------------------------------------------------------------ Stephen B. Lawson, President and Chief Executive Officer /s/ PHILLIP W. WONG, Executive Vice President and Chief Financial Officer ------------------------------------------------------------------------- Phillip W. Wong, Executive Vice President and Chief Financial Officer 19

CCBT FINANCIAL COMPANIES INC 10-Q